I. Introduction Every year, donors from the Organization for Economic Cooperation and Development

3200 Words Apr 23rd, 2019 13 Pages
I. Introduction
Every year, donors from the Organization for Economic Cooperation and Development (OECD) give billions of dollars in foreign aid, with the United States contributing a large percentage of this sum (Eischen 2012) (Figure A). However, the amount and way in which this money is handled has given rise to heavy criticism. Books such as Dambisa Moya’s Dead Aid: Why Aid is Not Working and How There is a Better Way For Africa and the innumerable news articles lamenting the state of the corrupt bureaucracies of receiving countries not only discuss the inefficiencies of foreign aid but also accuse these programs of being harmful (Ayodele et al. 2005). One such article claimed that, due to inefficiencies and corruption, at least
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Many of these states do not have the capital or support to make these provisions, and private actors will often not do so either because of the free rider problem inherent in such public goods. Foreign aid could fill this gap (Selaya and Sunesen 2012). However, it is important to determine which type of aid will be most effective in reaching this goal.
In this paper, foreign aid refers to official development assistance (ODA), which is where the aid has concessional terms and the grant component is at least twenty-five percent (Wolf et al. 2013). While foreign direct investment is defined by the World Bank as “the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor (World Bank).” There is also a focus on the United States as the donor state.
The objective of this paper is to analyze the effectiveness of foreign aid flows to certain sectors in attracting FDI. This is done from both a theoretical and an empirical point of view, starting from the broad focus of comparing physical capital and complementary factors of production and then narrowing the focus to economic and social aid. The main
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